INTERNATIONAL BUSINESS; World's Largest Brewer Set To Increase China Holdings

By DAVID BARBOZA

Published: December 9, 2005

InBev, the world's largest producer of beer, has won a fierce bidding war and is set to acquire one of China's largest brewers for about $750 million, according to people briefed on the talks.

The deal to acquire the producer, Fujian Sedrin Brewery, is one of the largest foreign purchases of a Chinese company. And it represents the latest push into China by the world's biggest beer makers, which have been aggressively competing to buy assets and win stakes in the nation's fragmented and undeveloped, yet fast-growing, beer market.

Marianne Amssoms, a spokeswoman for InBev, which is based in Brussels, declined to comment Thursday on the negotiations for Fujian Sedrin. Officials at Fujian Sedrin could not be reached for comment.

But people briefed on the deal said InBev had recently outbid Heineken, based in the Netherlands and Anheuser-Busch, based in the United States, to win the right to take complete control of Fujian Sedrin, a state-owned brewery based in one of China's wealthiest coastal provinces.

Analysts said they were surprised at the high price Fujian Sedrin drew, because it is only the nation's eighth-largest brewer and China's beer market is not very profitable.

Yet for the last two years, the heavyweights of the beer industry have been snapping up assets in China, which recently surpassed the United States to become the largest beer market. With growth in beer sales weakening in the United States and Europe, brewers have been consolidating and seeking acquisitions, particularly in developing countries.

Last year, Interbrew, the giant Belgian beer maker, merged with AmBev, the big Brazilian beer producer, to form InBev. One of the company's biggest target markets has been China, where it has made a string of deals, investing more than $400 million in Chinese breweries before its bid for Fujian Sedrin.

Other brewers are rushing here, too.

Last year, Anheuser-Busch paid $694 million for Harbin Brewery, based in northeast China. And earlier this year, Anheuser tripled its stake in Tsingtao Beer, the nation's largest brewer, to 27 percent.

But many of the deals have puzzled analysts, who say China's market is highly fragmented, with more than 400 breweries. While consumption is growing steadily, the market is struggling with overcapacity and low prices. A bottle of beer in China often costs as little as 25 cents.

So why are beer companies bidding up prices and scrambling to get here?

''I don't know,'' said Joe Zhang, an analyst at UBS who wrote a report on the beer sector last June called ''Burning Cash Slowly.''

Mr. Zhang added: ''If they have $2 billion, why don't they give it to me and let me invest it in some stocks? That'll do much better over the next few years.''

The three largest brewers, which have a 35 percent market share, made only $100 million in profits in 2004, he noted, a seventh of what Heineken made and about 5 percent of what Anheuser-Busch reported.

''Don't expect this picture to change over the next few years,'' Mr. Zhang said.

Denise Chai, an analyst at Merrill Lynch, agreed. ''To quote the former head of Harbin Brewery: 'Everybody wants a seat at the movie, even though they know nothing's going to be playing for 20 years,' '' Ms. Chai said. ''It's a very low-margin, fragmented business.''

Of the foreign buyers, she said, ''They're willing to pay a heck of a lot of money for 'some day.' ''

But the analysts also say there are some bright spots: China's per capita beer consumption is still relatively low, about 18 liters, compared to about 84 liters in the United States and 75 in Western Europe. The nation's growing wealth and demographics also favor increased beer consumption.

InBev, which had been active in China since 1984 as Interbrew and called itself the nation's third-largest brewer before the deal for Fujian Sedrin, has said it plans to establish strong positions in China's wealthier provinces. Indeed, if the deal to acquire Fujian Sedrin is approved by the Chinese government, InBev will have major beer holdings in China's five wealthiest coastal provinces, which together are home to about 350 million people.